The Market's Measure
Bond Bears Awake From Hibernation

Bond Bears Awake From Hibernation

Inverse funds come out of the cold after several months in the wilderness

If you read the recently released Federal Open Market Committee meeting minutes, you’d likely assume the Fed was in no hurry to raise interest rates. Data, it seems, will drive the Fed’s decision to hike rates, not the calendar. And the data? Well, there’s the GDP number. Gross domestic product increased at a feeble 0.2 percent annual rate in the first quarter, in part due to harsh winter weather.

Weather, of course, changes. And so, too, does economic data.  On Thursday, more buoyant second quarter data points were dished out. First, there was a dramatic drop in weekly jobless claims, a decline far greater than expectations. Then there was a surprisingly upbeat Chicago PMI.

Two data points do not a trend make but, still, they point to some traction in the economy. In fact, a quick check of Fed Fund futures trading on Thursday indicated the perceived probability of a rate increase coming out of the upcoming June FOMC meeting actually increased overnight.

Market participants have been anticipating rate increases in other venues. Yields on the benchmark 30-year Treasury bond have risen 20 basis points in the past two weeks. So dramatic has the yield backup been that bearish bond funds are now finding footholds after a 16-month slide. Take a look, for example, at the chart of the  ProShares UltraShort 20+ Year Treasury ETF (NYSE Arca: TBT).  TBT prices have pierced the dotted downtrend line after coming off a rounded bottom at the $40 level. 

 

Click to Enlarge

 

Technically, TBT’s poised for a test of an October support cum resistance level near $50, a move that would take it above its 200-day moving average.  Presently, TBT’s trading near $45, so there’s a 20 percent potential gain awaiting bond bears in the near term.

And after that? That, like the Fed’s willingness to hike rates, will largely be data dependent.

 

 

Brad Zigler is REP./WealthManagement's Alternative Investments Editor. Previously, he was the head of marketing, research and education for the Pacific Exchange's (now NYSE Arca) option market and the iShares complex of exchange traded funds.

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